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Investing in higher-risk shares

Many people now invest in company shares, and the choice of where to buy them from is wide. As well as buying shares in large, listed companies, you can buy shares in smaller companies, traded on markets such as:

  • the Alternative Investment Market (AIM);
  • the Plus Quoted Market; or
  • an Initial Public Offering (IPO) or pre-Initial Public Offering (pre-IPO) – when a company wants to raise money and first offers shares to the public.

Although every share investment carries some degree of risk, investing in non-listed companiews has a higher risk because:

  • they are often smaller, growth companies without proven track records;
  • there is sometimes a big difference between how much you pay for the shares and how much you can sell them on for;
  • it can be difficult to find a buyer for some shares – particularly IPOs and pre-IPOs. This could mean that you cannot sell them on when you want to or that you have to accept a much lower price than you paid for them;
  • shareholder influence can sometimes be limited because the majority of the shares may be closely held (e.g. by company directors);
  • publicly available information may be less comprehensive than that provided by listed companies; and
  • there is an increased risk you could lose some or all the capital you invest.

These types of shares may be suitable for some investors but they are not for everyone.

What firms should do

When recommending higher-risk shares, firms have to make sure they are suitable. They should take into account:

  • your previous investment experience;
  • how much you know about investments;
  • your financial situation;
  • why you want to invest; and
  • how much you risk you want to take.

They have to give you enough information so that you can make an informed decision. This means they have to explain clearly how the investment works, what the risks involved are and what that might mean for you.

How firms may contact you

One method firms use to get your contact details is to buy information from share registers, which are publicly available. They may then write or call you offering a free research report on stocks you already hold and ask for your permission to contact you in the future with investment opportunities. Firms may also send direct offer financial promotions, in the form of a document offering you shares in a company directly, which may also ask for permission to call you in future.

If you are not sure about whether you would want to invest, think carefully before giving your permission or investing directly in the companies you are sent offers for.

Firms are not necessarily breaking any rules contacting you in this way. But we expect them to take extra care to make sure they gather enough information about your personal circumstances before they recommend an investment they think is suitable.

Even if they are not recommending a particular investment to you, under FSA rules they may still have to make sure you have the knowledge and experience to understand the risks involved in any investment they tell you about.

Protect yourself

  • Make sure you understand the risks involved in the shares you want to invest in.
  • Make sure you are comfortable with the level of risk involved.
  • If you buy high, or very high-risk shares make sure you understand there is an increased risk you may lose some or all of your capital.
  • Ask the adviser questions if there is anything you are not sure about.
  • Do your own research:
    • Try to find out what the current market price is for the shares you are offered. You can do this by looking in the financial press or checking with a broker. Some firms buy shares from other brokers so you may not pay the market price for them.
    • Find out about the company the shares are for. Look on their website (if they have one), get a copy of their annual report and read the financial press.
  • Be aware that it may be difficult to get evidence or confirmation of the shares you have bought from the firm.
  • If you are not sure about whether to invest, consider getting professional financial advice. See Getting help.

If you think you have been contacted by a firm which has not taken all the steps we have outlined above, or are concerned with how a firm has dealt with you please call our Consumer Helpline on 0845 606 1234 and provide details of the firm. The Helpline is open Mon – Fri, 8am – 6pm (call rates may vary).

To find out more about how to protect yourself when buying over the phone, see On the phone.